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Rating Action:

Moody's affirms ONGC's Baa1 ratings; outlook stable

16 Jul 2019

Singapore, July 16, 2019 -- Moody's Investors Service has affirmed Oil and Natural Gas Corporation Ltd.'s (ONGC) Baa1 local and foreign currency issuer ratings, and the Baa1 ratings on the senior unsecured bonds guaranteed by ONGC and issued by ONGC Videsh Limited and ONGC Videsh Vankorneft Pte. Ltd.

The outlook on all the ratings above is stable.

RATINGS RATIONALE

"The ratings affirmation reflects our expectation that ONGC's credit metrics, which have improved over the last 12 months because of the high net realized oil price, will remain appropriate for its ratings," says Vikas Halan, a Moody's Senior Vice President.

ONGC's consolidated credit metrics — as measured by retained cash flow (RCF) to net debt — improved to 51% for the fiscal year ended 31 March 2019 (fiscal 2019) as compared to 40% for fiscal 2018. The improvement was largely driven by better earnings, which in turn was because of higher realized crude oil prices.

"Based on an average net realized oil price assumption of $65 per barrel, we expect that the company's earnings for fiscal 2020 will be broadly in line with fiscal 2019," adds Halan, who is also Moody's Lead Analyst for ONGC.

This should result in ONGC generating positive free cash flow - despite the company's high level of capital spending and shareholder returns - which Moody's expects the company will use to reduce its borrowings. As such, ONGC's credit metrics will likely remain appropriate for its ratings category over the next 12-18 months.

Moody's ratings for ONGC are based on the full consolidation of Hindustan Petroleum Corporation Ltd. (HPCL, Baa2 stable), which also includes the full consolidation of HPCL's 49%-owned joint venture, HPCL-Mittal Energy Limited (Ba1 stable).

ONGC's Baa1 issuer ratings are primarily driven by its standalone credit profile, as captured in its baa1 Baseline Credit Assessment (BCA).

The company's BCA reflects in turn its 1) position as the largest integrated oil and gas company in India with significant reserves, production and crude distillation capacity; 2) substantial operating cash flow generation capacity; and 3) credit metrics that have improved but will remain constrained by volatile — although range-bound — oil prices and high shareholder returns.

At the same time, the BCA incorporates Moody's expectation that the company will not be asked to share fuel subsidies, as long as oil prices stay below $70 per barrel.

ONGC's rating also incorporates a high likelihood of extraordinary support from and very high dependence on the Government of India (Baa2 stable). However, this assumption does not result in any ratings uplift, because the sovereign rating is below ONGC's BCA.

ONGC generates sufficient cash flow to fund its capital spending and shareholder returns. However, the company's cash and cash equivalents of INR102 billion as of 31 March 2019 are insufficient to cover its debt maturing over the next 12 months of INR545 billion. Of this, about INR255 billion represents working capital loans and scheduled debt maturities at its subsidiaries -- HPCL and Mangalore Refinery and Petrochemical Limited -- and are not guaranteed by ONGC. Of the remaining INR290 billion, ONGC has already repaid or refinanced about INR100 billion as of 15 July 2019.

Given ONGC's strong credit metrics and status as a government-owned company, it maintains strong access to debt funding markets and can refinance its remaining short-term borrowings.

Furthermore, ONGC maintains substantial financial flexibility, as seen by its stakes in Indian Oil Corporation Ltd (Baa2 stable) and Gail (India) Limited (Baa2 stable), which were valued at about INR226 billion at 15 July 2019.

In terms of environmental, social and governance (ESG) factors, the ratings also consider the following:

1) ONGC's exposure to carbon transition risk, environmental regulations for emissions and water shortages. The global efforts to transition to low-carbon energy will gradually lower demand for petroleum products in the coming decades. However, the carbon transition risk for ONGC is partly mitigated by India's significant dependence on imports of oil and gas, which will continue till 2040 as per Government of India's National Energy Policy of 2017.

ONGC also has a track record of compliance with environmental regulations and has been implementing strategies for countering water shortages through rain water harvesting and sea water desalination plants.

2) ONGC's close linkage to its largest shareholder, the Government of India, which has significant influence on the company's financial policy and business strategy.

The government owns a 64.25% direct stake in ONGC and appoints all the directors on the company's board.

Moreover, the risk from government influence was evident in January 2018, when the government sold its 51.11% stake in HPCL to ONGC for INR369 billion, which resulted in the weakening of ONGC's credit metrics. Because of this risk, ONGC's ratings are constrained to no more than one notch above the sovereign's Baa2 rating.

The ratings outlook is stable, reflecting Moody's expectation that shareholder returns and the company's growth plans will continue to be executed within the tolerance level of its current ratings. In addition, the stable outlook assumes the company will improve its debt maturity profile, such that its cash and cash equivalents, along with committed bank facilities, can cover debt maturing over the next 12 months.

A ratings upgrade to A3 will require ONGC to improve its liquidity profile, maintain strong credit metrics, and also for Moody's to upgrade India's sovereign rating to at least Baa1. Credit metrics indicative of higher ratings include RCF/net debt exceeding 40% and EBIT/interest below 8x, both on a sustained basis.

ONGC's ratings could experience downward pressure if 1) Moody's downgrades the sovereign's rating; or 2) ONGC increases its pace of acquisitions, such that the company faces higher business risk and a deterioration in its credit metrics; or 3) there is a sustained decline in oil prices, leading to weak cash flow generation for ONGC and a deterioration of the company's credit metrics.

Credit metrics that would indicate downward pressure on the ratings include RCF/net debt below 30% and EBIT/interest below 7x.

The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in October 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Oil and Natural Gas Corporation Ltd. (ONGC) is India's largest integrated oil and gas company. Its main operations include upstream exploration and production, although it also has operations in the downstream segments.

ONGC is 64.25% owned by the Government of India (Baa2 stable).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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